A Rejoinder to John Carney on MMT and Austrian Economics

CNBC's John Carney has responded to my earlier comments on his favorable view of Modern Monetary Theory.

In his response, Carney writes:

The MMTers believe that the modern monetary system—sovereign fiat money, unlinked to any commodity and unpegged to any other currency—that exists in the United States, Canada, Japan, the UK and Australia allows governments to operate without revenue constraints. They can never run out of money because they create the money they spend.

Here is problem one with Carney's view of MMT. MMTers do not hold that all fiat money is the same. Although they object to Federal Reserve notes, they see no problem with a fiat currency being issued they call "US notes".

Here is MMTer  Bill Still, who is seeking to become the Libertarian Party presidential nominee:

A sovereign nation does not have to borrow, in fact, being debt-free is the very definition of sovereignty. Pay off the existing bonds -- which is our National Debt -- as they come due, but pay them off with debt free U.S. Notes (or their electronic equivalents) instead of Federal Reserve Notes, which are all borrowed into existence.

Here is MMTer Cullen Roche on fiat money:

Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces.

Thus, when Carney tries to give the impression that MMTers and Austrians have a lot in common, he is just wrong. Austrians reject the idea that a fiat money of any sort is necessary in a highly industrialized economy (and any other type economy). A gold coin standard could function much better in the eyes of Austrians. A government couldn't inflate a gold standard at will, further the Austrians see no need to ever inflate a currency, unlike MMTers.

Here's Roche again:

The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary

An Austrian simply doesn't see the world this way, where "irrational participants" occur on such a scale that they must be counteracted by government. An Austrian would first ask, if there are so many "irrational participants" who is to say they aren't in government also? Remember, before the real estate crisis, it was Fed chairman Bernnake who said there was no problem with the real estate market.

Secondly, Austrians would argue that the "cluster of errors"s made because of fiat currency creation are what cause the boom-bust cycle and that without fiat money creation no such "cluster of errors" would occur. Thus, the Austrian position here is diametrically opposed to the MMT view that there are times when monetary inflation is called for.

Carney writes:

The MMTers think the financial system tends toward crisis. Wenzel writes that the financial system doesn’t tend toward crisis. But a moment later he admits that the actual financial system we have does tend toward crisis. All Austrians believe this, as far as I can tell.

What has happened here is that Wenzel is now the one confusing the world as it is with the world as he wishes it would be. Perhaps under some version of the Austrian-optimum financial system—no central bank, gold coin as money, free banking or no fractional reserve banking—we wouldn’t tend toward crisis. But that is not the system we have.

The MMTers aren’t engaged with arguing about the Austrian-optimum financial system. They are engaged in describing the actual financial system we have—which tends toward crisis.

They even agree that the tendency toward crisis is largely caused by the same thing, credit expansions leading to irresponsible lending.

If I say that automobiles don't tend to drive off cliffs, but if I am looking at a baby that is behind the driving wheel of a car that is about to go off a cliff and I say, "Hey, that car is about to go off a cliff." It doesn't in anyway mean that I am saying all cars will go off cliffs.

In the same way, the financial system, like a car, does not have a tendency to drive off a cliff. If the Fed prints money it may go off a cliff, just as a car may go off a cliff when driven by a baby. My solution for the cars being driven by babies is to stop the babies from driving cars, for the economy, it is to stop the Fed from driving the economy. To say that I should just deal with the reality of a baby driving a car and hop in the back seat, makes no sense. Anymore than it makes sense, when arguing monetary policy, to say hey just deal with the Fed's inflationary boom-bust ways.

Carney then writes:

The MMTers say that “capitalist economies are not self-regulating.” Again, Wenzel dissents. But if we read “capitalist economies” as “modern economies with central banking and interventionist governments” then the point of disagreement vanishes.

John, puhleeze. Of course, if you define capitalism to mean, well, the exact opposite of capitalism "the point of disagreement vanishes."

Carney writes:

Wenzel’s challenge to the idea of functional finance is untenable—and not particularly Austrian. He argues that the subjectivity of value means it is impossible for us to tell whether something is “good for the economy.” Humbug.

I should first note that I specifically state that I am referencing how "fiscal policy should be measured" Indeed, I further write:

Thus, it is extremely dangerous to go around talking about what is "good for the economy", especially when you are talking fiscal policy.

Far from this being "not particularly Austrian", it is at the heart of the Austrian view that subjective value can not be measured in the pubic sector ( as opposed to the private sector where exchange tales place voluntarily between two individuals). Indeed, the Austrian economist Murray Rothbard, even suggested that ALL government spending is a negative that should be subtracted from GDP:.

..most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm's productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government's "productivity" is measured—mirabile dictum—by how much it spends! Early in their construction of national product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public—because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its "productivity" is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society—far from satisfying the wants of consumers—are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities—like the buggies of our example. In either case, it becomes evident that the "public sector" is actually antiproductive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the anti-productive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics.

Carney may, or may not, agree with this view, but he must agree that it is distinctly Austrian and not in line with MMT thinking.

Carney concludes by stating:

At the level of theory, Austrians and MMTers have a lot in common. Tactically, an alliance makes sense.

I just don't see where the Austrians and MMTers have much in common at all. And, a tactical alliance with a group that is in favor of creating a new fiat money, to replace the current fiat money, seems to be of little value to Austrians. More than anything, there is great educational value in pointing out the important differences between MMTers and Austrians.

The Dark Side of Economist Oskar Morgenstern

Richard Ebeling emails a link to his review of the book, Von Neumann, Morgenstern and the Creation of Game Theory by Robert Leonard.

Oskar Morgenstern is best known as the co-developer, with mathematician John von Neumann, of game theory. Their book The Theory of Games and Economic Behavior is a classic.

But, Peter Klein notes:

Game theory can be fun and interesting. It’s central to current mainstream research in industrial organization and corporate strategy. It’s been taught to a generation of MBA students. Unfortunately, according to FastCompany, nobody in business actually uses it.

In his review, Ebeling writes:

...what is less well known is that Morgenstern was a prominent member of the Austrian School of Economics before the Second World War.

His first book was on Economic Forecasting (1928), which unfortunately has never been translated into English. He presented a biting and insightful analysis as to why quantitative models would never be able to successfully predict the economic future. His three fundamental arguments were (1) that historical events are too unique and interdependently complex to be reducible to statistical probability analysis; (2) any public forecast easily will result in people taking the forecast into consideration, and therefore acting in ways different than what the forecast presumed; and (3) how individuals act is dependent on their expectations of how they expect others to act, and understanding and interpreting people’s subjective meanings and intentions is not readily reducible to strictly quantitative categories and classifications for statistical study...

Leonard traces out the development of Morgenstern’s thinking in the 1920s and 1930a under the influence of Austrian Economists such as Ludwig von Mises and Hans Mayer, and his friendship with Karl Menger, Jr., the son of the founder of the Austrian School.

But what he also brings out is how Morgenstern increasingly turned against his “Austrian” roots...

Even worse, after 1934, with Hayek now a professor at the London School of Economics, and Mises teaching in Geneva, Switzerland, Morgenstern attempted to portray himself as the “leader” of the Austrian School in an Austria that was now a fascist-type authoritarian dictatorship. He worked as a senior advisor to the Austrian government, often offering policy advice far removed from a free market perspective...

In addition, Leonard points out that Morgenstern’s diary from this period is sprinkled with often heavily anti-Semitic sentiments, in spite of the fact that many of the members of the Austrian School at this time were Jewish (including Mises), and who had been among those encouraging and supportive of his own work and professional advancement.

As a side note, Ebeling tells us in his review that he took a course with Morgenstern and he is clearly shocked by some of the revelations about Morgenstern . See Ebeling's full review, here.